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Legal Environment Final Exam
Questions And Answers
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Sarah owns Fine Cuts hair salon. Hairdressers each rent a chair in the salon where they can
style customers' hair, and Sarah provides receptionist services, maintains the space, and sells
some hair care products at the front of the salon. The hairdressers must pay 35 percent of their
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profits to Sarah in return for the chair space and earn a commission for each hair product that
they sell. Is Sarah selling the hairdressers a security in Fine Cuts? - ANS No, the
hairdressers are not expecting to earn money predominately from Sarah's efforts
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Jeremy is a doctor who would like to be able to provide low cost medical care to underprivileged
families. Jeremy and two nurses form Medicine for All and file a registration statement and
prospectus with the SEC. The prospectus states that Medicine for All is looking for funding for
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the salaries of Jeremy and the nurses and medical supplies and that the organization will earn
little profits. Will the SEC allow Medicine for All to sell its securities? - ANS Yes, provided
all of the required disclosures are made clearly
In the registration statement filed with the SEC, DrugsUSA stated that it had three different
medicines approved by the Food and Drug Administration (FDA). In reality, DrugsUSA had filed
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applications for approval with the FDA that were still pending. The SEC approved the sale of
DrugsUSA stock, and Marilyn purchased $100,000 worth of stock. Two months later, all three of
DrugsUSA's applications were denied by the FDA. The stock price plummeted, reducing the
value of Marilyn's shares to a total of $2,000. What, if anything, can Marilyn recover? - ANS
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Marilyn can recover $98,000 from DrugsUSA and the signatories of the registration statement.
Company A completes its initial public offering (IPO) and complies with all of the 1933 Act
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requirements. Must Company A register with the SEC as a reporting company under the 1934
Act? - ANS Yes, because Company A has completed a public offering under the 1933 Act.
James, the CEO of a major restaurant chain, learns that he is about to be fired by the Board of
Directors. Furious, he writes a press release calling all of the company's executives "greedy
scoundrels," and stating that "whoever has to fill my shoes will have to answer to the
shareholders for the financial mess that they have created." James had no actual knowledge of
any financial mismanagement by the company. The company's stock drops substantially in the
few hours of trading that occur before the markets close after James releases his statement.
The next day, James issues an apology, saying (truthfully) that his press release had no factual
, basis, and the stock recovers over the course of the week. Is James liable for a securities law
violation? - ANS Yes, James is liable for making an untrue statement of material fact
Through her job as a paralegal at the Attorney General's office, Charlotte learns that MegaCorp
has been defrauding its customers. Although the information is highly confidential, Charlotte
shares it with her mother and asks her not to tell anyone. Charlotte's mother does not disclose
the secret, but she does sell her stock in MegaCorp. Has Charlotte's mother committed a
violation of securities law? - ANS Yes, Charlotte's mother has committed insider trading by
misappropriation
Bobby works as a janitor for a large office building. One night when emptying the recycling bins
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in the offices of Big Co., Bobby sees a memo marked "Confidential - Eyes Only" on the top.
Curious, Bobby reads the memo and learns that Big Co. is closing half of its juice manufacturing
plants in the U.S. and laying off 2,000 employees. At the end of his shift, Bobby tells this to his
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supervisor and good friend who promptly sells her stock in Big Co. the next day. Is Bobby liable
for insider trading? - ANS Yes, as a tipper.
After acquiring the RazRSleek brand name and electric shaver assets, Flyy controlled 55
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percent of the electric shaver industry in the United States. Chaser, a competitor, claimed that
the acquisition of such a large market share was a violation of the law because the increased
competition from Flyy would decrease Chaser's profits. Does Chaser have a valid claim? - ANS
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No, unless Flyy excluded competitors and controlled prices.
Smalltown has two family-owned hardware stores that have been in business for years. Major
Hardware opens one of its superstores in Smalltown, advertising extremely low prices, which
are at below cost. Because Major owns stores nationally, it is able to keep prices extremely low
until it forces both of the family-owned stores out of business. Once Major is the only hardware
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store in town, it raises its prices enough to make up for its former losses and to make some
additional profit. Has Major violated any antitrust laws? - ANS Yes, Major has engaged in
predatory pricing
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Paul's Pen Co. manufacturers and sells an inexpensive ball-point pen. Stacy's Stationery
purchases the pens for $.25 each in quantities of 1,000. Stacey's discovered that a national
chain, a competitor of Stacey's, buys the pen at $.20 for 1,000. If Stacy's Stationery sues Paul's
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Pen Co. for price discrimination: - ANS Stacy's Stationery will win unless Paul's Pen Co.
can justify the price differential.
Jane's Boutique would like to buy some of Holistic Health Co.'s popular nail polish for resale.
Holistic Health tells Jane that if she buys less than 100 units, she must also buy a small order of
their new vitamin product. Jane has no interest in selling vitamins in her boutique. If Jane
wanted to challenge Holistic Health's requirement as an illegal tying arrangement, what
additional facts would she have to prove? - ANS Holistic Health has significant power in the
nail polish market and is shutting out a significant portion of the vitamin market through the tying
arraignment
